LTIMindtree and L&T Technology Services plug into high-growth nodes

The listed information technology (IT) subsidiaries of engineering giant Larsen & Toubro (L&T), LTIMindtree (LTIM) and L&T Technology Services, have seen sharp upmoves over the past fortnight, with returns ranging from 14 to 18 per cent.

Both have outperformed the peer index, the National Stock Exchange Nifty IT, which has gained about 8 per cent, while the benchmark Nifty 50 is up 4 per cent during this period.

These gains are due to a recovery in key verticals, new growth avenues, and a positive medium-term outlook, prompting some brokerages to upgrade the two stocks.

Upgrades for LTIM, the larger of the two IT firms, began after the April-June 2024-25 (FY25) quarter (Q1) results, which exceeded expectations.

With a 2.6 per cent sequential growth and a 3.7 per cent rise compared to the year-ago quarter in constant currency terms, the company comfortably surpassed the growth expectations of 1 per cent.

The quarter s growth was driven by high technology, which increased 7.9 per cent sequentially, led by momentum in key accounts, while banking, financial services and insurance (BFSI) saw a 2.9 per cent growth after four consecutive quarters of decline.

The recovery in key verticals and positive management commentary have led to these upgrades.

Analysts at Kotak Institutional Equities, led by Kawaljeet Saluja, believe that LTIM is on track for a healthy recovery in revenue growth over the next couple of years from the trough of 2023-24 (FY24), aided by improving spending sentiments in the BFSI vertical. Revenue growth in the US in dollar terms is expected to improve from 4.4 per cent in FY24 to 6.5 per cent in FY25 and further accelerate to 11 per cent in 2025-26 (FY26) due to recovery in its largest verticals of BFSI and high technology.

Following the Q1 results, analysts Abhishek Pathak and Keval Bhagat of Motilal Oswal Research upgraded the stock to  buy  due to its superior offerings in data engineering and enterprise resource planning modernisation, positioning it well to capture pre-generative artificial intelligence expenditures.

They expect the company to outperform its largecap peers and project low double-digit constant currency growth for FY26.

While they are optimistic about revenue growth, Motilal Oswal Research is cautious about margins, which pose a key risk.

A rerating depends on effective margin recovery, primarily driven by volume recovery, as there are limited levers apart from revenue growth.

Any further hiccups in execution could result in downside risks to estimates, according to the brokerage.

LTIM recently unveiled its ambition to become one of the top 5 global engineering research and development (ER&D) companies and to scale its revenue to $2 billion over the medium term from the current $1.14 billion.

The company is focusing on mobility, sustainability, and technology, aiming to gradually increase revenues for each area to $1 billion.

It targets a margin of 17-18 per cent over the medium term, up from the current 17 per cent.

The company sees potential for margin improvement and has identified several strategies to enhance its operational playbook, including increased customer mining, higher revenue quality, a greater fresher mix, and increased offshoring.

Sharekhan Research has a  buy  rating and believes that the company s approach is well-directed.

With its deep domain expertise and cutting-edge technological solutions, it is well-positioned to capitalise on growing ER&D opportunities.

Kotak Research has also maintained its  buy  rating with a target price of Rs 6,300.

The firm has raised its target multiple to 40 times FY26 earnings, believing that the new strategy opens up new avenues for growth, particularly in previously weak areas such as mobility, which is growing rapidly among its peers.

The stock has underperformed the BSE IT index by 15 per cent over the past year due to negative earnings revisions and a reduction in margin guidance.

However, Antique Research believes the company s outlook is improving, as management expects broad-based growth moving forward.

Analysts at the brokerage, led by Vikas Ahuja, anticipate strong medium-term revenue growth and margins.

Brokerages have maintained  hold  or  sell  ratings on the stock due to valuation concerns.